Eleven Central Bankers Spoke This Week… And one more will speak today. The onslaught of Fed presidents and governors give investors more views to consider, as the next Federal Reserve Monetary Policy meeting nears on October 31 to November 1.
What it means— Was it something I said? Chair Powell spoke Thursday at the Economic Club of NY. He told the audience that inflation was still too high and that the economy might have to cool off a bit more to get inflation under control. Well, “When all you have is a hammer…” and all that. Investors took this to mean higher rates and pushed the yield on the 10-year Treasury bond to 4.99% and the 30-Year Treasury to 5.10%, levels not seen since 2007.
Come to think of it, that’s exactly when the central bank started manipulating the markets. Imagine that. The other speakers shared a variety of opinions that overall sounded like, “Wait and see at this meeting, but don’t be surprised to see a bump in December before we go into hibernation for the winter and see what happens in the spring.” The caveat—and it’s an elephant-sized caveat—is the war in the Gaza Strip. If it gets ugly, investors might add to their U.S. Treasury bonds for safety but so far have focused on less than 5-year commitments.
Israel Prepares for Ground War to Rid Gaza Strip of Hamas… Israel clearly has stated that their goal is to remove Hamas from the area. What happens after, in terms of a power vacuum, is a topic for another day.
What it means— By invading Israel and targeting civilians, Hamas, funded by Iran via Hezbollah, has successfully trashed the Abraham Accords, at least for the moment. The incursion has thrown more than 2.5 million people in the Gaza Strip into turmoil as Israel responds. Now, Iran is calling for regional powers to embargo oil sales to Israel, but there’s a problem. Egypt receives natural gas from Israel. The U.S. markets are jittery, with VIX elevated, but so far, we haven’t seen huge moves. For now, investors appear to be focused on higher rates for longer due to consistent retail sales (which bodes poorly, as higher yields woo investors from equities) and a mixed earnings season.
September Retail Sales Up 0.7%, Beating Estimate of 0.3%… After jumping 0.8% in August, retail sales surprised analysts by posting solid growth again last month.
What it means— Consumers proved that so far, the party hasn’t ended, but it comes with a couple of caveats. The due bills for student loans just went out, and home sales are in the deep freeze. If student loan repayment hits retail sales, it won’t show up until October, and it’s possible that potential home buyers who can’t afford a new home are buying cars instead. Whatever the reasons for spending, we should not ignore that retail sales aren’t adjusted for inflation. While monthly retail sales were up 0.7%, they were just 3.8% over the last year, or down 0.3% adjusted for inflation.
Earnings Are Mixed, With Netflix Up 13.5%, Tesla Down 4.8%, and Morgan Stanley Down 10%… Many stocks had a poor third quarter, as Fed action pushed rates higher.
What it means— Investors are only too happy to exchange TINA (There Is No Alternative) for TARA (There Are Reasonable Alternatives) as they weigh the latest company earnings. With questions about future earnings, investors are finding safe harbor in money markets and short-dated T-bills that pay 5% and up.
In a way, it’s two sides of the same coin, just as the Fed intends. The central bank wants to drain some energy out of the economy to tame inflation, which hits consumption and corporate profits. One of the big problems with the plan is that we don’t control the cost of energy, a big contributor to inflation. Another issue is that the current Fed is trying to eradicate 15 years of financial sins by shrinking its balance sheet. This isn’t fun. Expect hiccups along the way as we work toward a positive yield curve and inflation remains stubbornly above the Fed’s target.
Housing Starts Rose 7% Last Month After Falling 1.5% in August… Housing starts are notoriously noisy, and they rose to an annualized rate of 1.36 million units.
What it means— Single-family home starts were up 3.2% last month, whereas multi-family home starts jumped 17.1%. Overall housing starts peaked at 1.8 million units in April 2022. We’ve covered this ground before. It looks like builders are very sensitive to affordability and foot traffic and don’t want to be stuck with a lot of inventory. With mortgage rates around 7.5%, don’t be surprised if housing starts ease lower in the months ahead to keep inventory at a manageable level. Evidence is in homebuilder stocks are finally weakening.
September Existing Home Sales Dropped 2.0%, Down 15.4% Over Last Year… Even though sales eased, the median existing-home sale price grew 2.8% over last September and recorded three consecutive months of gains.
What it means— Inventory increased a smidge to 1.13 million units available, the equivalent of 3.4 months of supply at the current sales rate. We’re still held back by interest rates. People with low-rate mortgages from the “time that interest rates forgot” (2010 to June 2022) and current buyers are watching rates turn their dreams of home ownership into nightmares. When the Fed eventually lowers overnight rates, mortgage rates should dip a bit, but don’t expect your next mortgage rate to start with a “3.” Don’t expect the housing market to come out of the deep freeze before next year, because neither buyers nor sellers are motivated to move.
SURPRISE! Savannah, GA, Man Gets $1.4 Million Speeding Ticket… Connor Cato was surprised to receive such an expensive ticket for driving 90 mph in a 55-mph zone. He called the court but was informed he had to pay the citation or appear in court. Apparently, in Savannah, anyone clocked at more than 35 mph over the speed limit must appear in court, so the $1.4 million fine is just a placeholder. The actual fine cannot be more than $1,000 plus court costs. Joshua Peacock, spokesman for the city government, said the huge fine was automatically generated by their citation software and was not meant to scare people into court. Right. Threatening people with an exorbitant fine when the city’s legal limit is 99.93% less than that is “just a placeholder.” It’s odd that the citation software is not coded to inform anyone clocked at more than 35 mph over the limit that they must appear in court, where the maximum fine could be $1,000, instead of a six-figure fine as a placeholder.
Data supplied by HS Dent Research
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